Commodities & Futures: London Fox to mend its ways

LONDON Fox, the commodities futures and options exchange, has understandably been keeping a low profile in the past year.

Its seven-year history has been a saga of ill-conceived and increasingly desperate schemes to boost business, which culminated last autumn in the resignation of its chairman and chief executive over a disastrous attempt artificially to inflate property futures trading.

What little news has come from the exchange since then has been bad. Ten directors, including the chairman and chief executive, resigned between June 1991 and May 1992.

Fox made a loss of pounds 646,000 in the year to March, with an exceptional cost of pounds 974,000 related to the property futures fiasco and the ensuing regulatory clean-up. In the previous year it made a pounds 470,000 loss.

Staff has been cut by a third since the scandal and the marketing department abolished.

In the past year, six Fox contracts failed. The exchange took over the Baltic Exchange's seven freight and agricultural futures contracts in 1991, but most trade fewer than 100 contracts a day.

Fox's raw sugar contract, once successful, has been on its last legs in recent years after New York captured its business. On Thursday it did not trade at all.

It has not helped London Fox that world prices for its traditional, core contracts - cocoa, coffee and sugar - have been in the doldrums for years (though they have picked up recently).

But that is no excuse: the New York commodity exchanges are getting the business instead of London, even with low prices. The London Metal Exchange has also experienced low prices and demand, but it is doing record business.

Perhaps Fox was ill-fated from its frivolous launch, complete with firecrackers and parachuting miniature foxes. Or does its dismal performance mean there is no longer demand for commodities futures in London?

If the demand exists, why has Fox failed when the LME, the International Petroleum Exchange, and especially Liffe, the financial futures exchange, have been so successful. After seven misguided years, can Fox be revived?

The dynamic new management providentially brought in to cure the ailing exchange is looking into those questions now. Fox's chief executive of seven weeks is Robin Woodhead, a lawyer and former founding chairman of London's energy futures exchange, the IPE, who has served as director of the trade house ED & F Man and managing director of its broking company, Premier Man.

Joining him as non-executive chairman in January will be Michael Jenkins, who is retiring as Liffe's one and only chief executive. If that experienced pair cannot turn the exchange round, no one can.

The root of the exchange's problems have been diagnosed as bad business strategy, far higher costs than income, neglect of its core cocoa, coffee and sugar contracts, and failure to keep pace with a changing membership.

A spend, spend, spend approach to improving business led the exchange to create a huge marketing budget and throw money into dubious new contracts which had doubtful backing from members.

The exchange spent more of its resources attempting to take over the New Zealand Futures Exchange last year, a far-fetched plan that fizzled out when the property futures scandal broke.

Rejecting the old approach, Mr Woodhead says he sees his mission as keeping the exchange on a sound financial footing and making the most of existing contracts. New contracts are on hold until the house is in better order.

The regulators, led by Philip Thorpe from the Securities and Investments Board as senior troubleshooter, have already made sure that proper reporting and controls are in place.

Fox has commissioned a study by the consultant Landell Mills on the viability of Fox's raw sugar futures contract, and the exchange will soon analyse each of its inherited Baltic contracts.

The result must be that marginal contracts will be axed. Lamb futures, for instance, traded one contract early last week, and there are other candidates.

Many of the famed trading houses that once supported the exchange and terminal markets have disappeared. Fox will have to get back in touch with its membership, now based on big US houses and medium-sized UK trading firms, and Mr Woodhouse believes his background suits him to the task.

It will have to make sure its contracts can attract the big computer-driven funds that bring liquidity to the US commodity markets.

In the words of one Fox director, it would be a great pity if the exchange no longer existed when commodity prices do perk up and hedging demand increases.